2016 Fourth Quarter
Yesterday’s illusions as today’s realities
By Joseph A. Grundfest
Today’s world of corporate governance bears little resemblance to the world that existed 40 years ago. 
Four decades ago the debate focused on concerns that corporate managers wielded authority at the expense of corporate shareholders, particularly in the context of fending off hostile takeovers. There was little debate over gender or ethnic diversity in the boardroom. Corporate social responsibility issues arose almost exclusively in the context of the impact of takeovers on local communities and on corporate employees. Every start-up’s dream was to go public through an IPO, but today many companies want to stay private for as long as possible and perhaps even avoid the IPO forever. And, the proxy process was viewed as largely ineffective. The idea that a shareholder could acquire less than 5 percent of a corporation’s shares and force a change in management or corporate policy would have been viewed as delusional. Today, it’s common.
  Many of yesterday’s corporate governance illusions have become today’s governance realities. 
The very essence of modern shareholder activism rests on the recognition that hostile takeovers are no longer necessary to oust incumbent management, to force a change in strategy, or to put a company in play. Instead, the modern governance process more closely resembles a continuous, open, shareholder referendum. On any day, at any time, an activist shareholder can announce a toe-hold position, release a white paper, and effectively challenge an incumbent management, all at far lower cost than was conceivable 40 years ago. This development marks great progress to some: it signals that managements can no longer ignore shareholder views. To others, this is a dangerous evolutionary step: it profoundly threatens managements’ ability to engage in risky long-term investment and planning, and forces managements to respond to short-term twists and turns in the market.  
Entrepreneurial start-up companies also no longer rush for an IPO as the symbol of ultimate success. Many successful Silicon Valley start-ups proudly trumpet that they prefer to stay private for as long as possible, in part because they are concerned that the new governance environment will make it impossible for them to run their companies in a manner that maximizes long-term value. To insulate themselves from these concerns, many companies prefer to be taken over by larger firms that commit to maintaining the start-up’s technology team and objectives. Other companies that go public will, if they can, adopt dual-class voting structures that prevent shareholders from asserting influence over internal governance decisions. 
Shareholders are also wagging their fingers at corporate boards for being too “pale, stale, and male.” That critique provides a powerful impetus for a range of “refreshment” proposals designed to accelerate board turnover. As a result, term limits, age limits, and overt diversity thresholds are among the various governance proposals that every publicly traded board has to wrestle with in today’s environment. Forty years ago, these concerns were rarely voiced, and certainly not with the vigor they have achieved today. 
As for the corporation’s role in society, every board now confronts a range of social issues that were barely on any board’s radar four decades ago. From the implications of global warming, to the dangers that certain commercial relationships can be attacked as violations of the Foreign Corrupt Practices Act, to the need to prevent gender and other forms of harassment, to the implications of income inequality and the gap between CEO compensation and compensation for workers at large, virtually every publicly traded entity is guaranteed to experience a level of “social scrutiny” that would have been unthinkable in the early years of this journal’s publication. 
And, the rate of change in the world of corporate governance is, if anything, speeding up and becoming more complex. So, looking forward 40 years, it seems clear that the corporate governance in 2056 will likely bear little resemblance to the world we see today. 
That’s a very easy and safe prediction


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